Stock markets tank

Stock markets all over the world have been falling. Investors (speculators) who were participating on the stock markets have booked huge losses or are sitting on equity that has little or no value.

How did this come about?

Mindless lending in US to the housing market created a housing bubble. Property prices rose as bankers and mortgage lenders offered money to just about anyone to buy a house. People with little or no capital bought houses (sub-prime borrowers) with the sole intention of selling them when the prices rose. Banks and Mortgage lenders lent money with holidays on principal payment and deferred payment plans. While the prices were rising, everyone made money.

Then suddenly prices stopped rising and payment holidays ended. People who had no income and no prospect of selling the house to the next fool walked away from them. Banks were left holding the property as most of the loans were no-recourse loans. With more people selling, property prices collapsed having a domino effect of all markets. Banks that had lent money were forced to book losses under the 'Mark to Market' accounting standards. Capital erosion was the order of the day and rating agencies down graded credit papers issued by investment banks and other banks thus reducing them to junk status.

Banks had no option but to raise money when none was available. Confidence has hit rock bottom and trust has got thrown out of the window. Banks stopped lending to each other as no one knew when the other party would collapse. In a concerted and coordinated manner Central banks pumped billions of dollars directly into banks, partially nationalizing them but to no avail.

Stock markets were hit because sellers could not find any buyers at any price. As need for money (liquid cash) increased markets had only one way to go, down.

Stock markets never reflect the true state of a company's health. In fear markets go down and in exuberance markets go up. On the way up any good news is magnified and on the way down even the smallest of bad news is magnified ten times.

Experts predict a 12 to 18 month period for the markets to remain in the grip of bears.

With the BSE Sensitive Index tanking below 10000 points yesterday, Indian investors, day traders, speculators have lost more than 50% of the value of their investment from the peak of 21,000 points touched in January 2008.

According to experts there is more to follow.

In such times if one wants to invest is stocks, one should look for companies with robust business models and Price to Earning ratios of 6 to 8. Otherwise it is safer to place your money in Fixed Deposit with some nationalized bank where you will be assured of both, Return of Capital and Return on Capital.